Oil Shock Drives Sharpest French Private-Sector Contraction Since 2020

France’s private sector shrank in May at the sharpest pace since 2020, as services activity declined faster and manufacturing output fell again, according to preliminary S&P Global survey data released on Thursday.

The fall was due to the war in the Middle East, according to French firms, who frequently cited fuel and energy cost pressures, as well as broader economic angst, as reasons for lower output.

S&P Global said that price indices continued their ascent in May, signalling a further rise in “inflationary pressures” across France and that input costs and output charges rose at their quickest rates in at least three years.

S&P Global’s flash PMI surveys are closely watched by markets because they offer the earliest monthly readings on private-sector activity and are seen as an early gauge of economic health.

Joe Hayes, principal economist at S&P Global Market Intelligence, said in a statement that its survey for France provided a “dire set of numbers.”

He said that the inflationary impact of the “oil-price shock” continues to spread, with price indices in both manufacturing and services rising once again.

“The surge in oil prices has hit households and businesses both directly at the fuel pumps, and indirectly as higher transportation and production costs are passed through to final goods and services,” he added.

Hayes said that another concern is “that a broader uplift in the economy’s overall price level raises the risk of further demand destruction.”

Demand destruction is when prices rise so high that consumers and businesses are forced to reduce their use of a product.

“Alarmingly, we saw private sector new orders plummet in May, giving us a clear indication that this shock has materially lifted recession risks for the eurozone’s second-largest economy,” he said.

Separate S&P Global surveys, also both released on May 21, showed similar pressure in Germany and the UK.

In Germany, business activity fell for a second consecutive month across the private sector in May amid weakening demand and “elevated inflationary pressures.”

The downturn continued to be led by the service sector, while manufacturing activity nearly stalled as factory orders “fell back into decline,” S&P Global said.

Germany is Europe’s manufacturing powerhouse. Eurostat data show it accounted for 26 percent of the EU’s value of sold production in 2024.

Phil Smith, Economics associate director at S&P Global Market Intelligence, said that the German economy is on course “to contract” in the second quarter of the year.

He said that in manufacturing, the boost that they saw from efforts to build stocks and get ahead of price increases and supply shortages appears to be “fizzling out” with the latest data showing a “renewed drop in new orders and a near-stalling of output growth.”

Smith added that disruption from “the effective closure of the Strait of Hormuz continues to filter through to prices, with input cost inflation showing a further acceleration due to the knock-on effects of higher energy prices and supply shortages.”

Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement that the UK economy is facing a “perfect storm” as political uncertainty compounds the impact of the war in the Middle East.

He said firms reported falling output, surging inflation, supply shortages, and job cuts in May, with PMI data pointing to a 0.2 percent quarterly contraction.

“The blame lies first and foremost with the war in the Middle East, though companies are also noting that domestic politics are taking an increasing toll, driving uncertainty higher, in turn deterring spending, hiring and investment,” he said.

Williamson said that just as the economy shows signs of “sinking into decline,” prices are surging higher to herald a marked upturn in inflation in the months ahead as these costs pass through to
consumers.

“This combination of a faltering economy and spiking price pressures leaves the Bank of England in a major quandary, facing the growing need to hike rates to help contain inflation but thereby adding to recession risks,” he added.